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The price of oil is falling faster than Russia can adjust its budget.
In June 2014, the global price of oil was over $110 per barrel. But due to a glut in supplies from elevated production from North America, Russia, as well as OPEC countries, oil prices have collapsed.
For Russia’s benchmark crude, Urals URL-E, the price fell to around $27 on Friday. Yet Moscow’s budget for fiscal 2016 was predicated on oil costing twice as much – $50 per barrel – itself a painfully low price.
On Saturday, Russian Finance Minister Anton Siluanov went on television to say this exceptionally low price for Urals oil meant a further reduction in revenues for his country’s budget, leading to an expected deficit of $38.6 billion for Russia in the coming fiscal year.
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“Therefore there is a difference of two times [in revenues], and I want to say that for budget income this difference equates to over 3 trillion rubles [$38.6 billion],” Siluanov said during the televised interview. Russia depends on sales of oil and gas for about half its annual budget revenues.
The collapse in oil prices has also hurt the ruble, which has lost more than half its value compared with the U.S. dollar since the summer of 2014. But Siluanov said he didn’t expect significant further devaluation of the Russian currency simply because the price of oil can’t fall much further than it already has. “Our main export commodity [oil], as we have already discussed, fell in price by four times,” Siluanov said. “One can hardly expect prices to fall four times further compared to today’s level.”
The pressure on the budget is driving Moscow to expand its austerity program that will see reductions in spending for virtually all government activity outside the military and social services. But even that effort has its limits, Siluanov said on January 13th in an interview in Moscow with Bloomberg Television.
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The finance minister said Russia had been relying on the country’s Reserve Fund, one of its sources of sovereign wealth, to make up some of the budget shortfall. But last month that fund lost 16 percent of its value, and he said it may run out of money altogether by the end of 2016 if the government doesn’t move to shore it up.
“We are extremely careful with our reserves,” Siluanov said, “and our task is to maintain these reserves at sufficient levels to ensure the stability of government finances.” In fact, Siluanov said his concern wasn’t as much for the current fiscal year, but the rest of the decade and perhaps beyond. He said Moscow needs to raise $20 billion for fiscal 2016 to prevent a deficit rising to over 6 percent of gross domestic product. Part of that will come from a 10 percent cut in spending. “In 2016, sure, we have to adjust that budget a little, but we’ll make it through the year,” Siluanov said. “We have to think beyond that.”
Ksenia Yudaeva, a first deputy governor of the Central Bank of Russia, agreed. “The concern is not just the budget deficit in one year,” she told Bloomberg Television. “What we are concerned with is really good medium-term budget strategy.” So far that strategy has been simply to pump more oil. On Jan. 2, the Energy Ministry said Russia’s oil output had reached record post-Soviet levels in December, in part because a devaluation of the ruble has made production more affordable, and in part to defy OPEC’s demand that all producers, both in and outside the cartel, work together to cut yield.
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The ministry report said production of oil and gas condensate increased to an average of 10.83 million barrels per day last month, compared with 10.78 million barrels per day in November. For all of 2015, output was up to 10.73 million barrels, compared with average 2014 production levels of 10.58 million barrels per day.
But all that accomplishes is to add to the fuel glut. Evidently what Siluanov and Yudaeva have in mind is a strategy that doesn’t rely solely on producing and selling the country’s most valuable commodity at fire-sale prices.
By Andy Tully Of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com